Portfolio return and standard deviation Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%. The expected returns over the next 6 years, 2013–2018, for each of these stocks are shown in the following table.

Expected return

Year

Stock L Stock M

2013

14%

20%

2014

14

18

2015

16

16

2016

17

14

2017

17

12

2018

19

10

a. Calculate the expected portfolio return, rp, for each of the 6 years.

b. Calculate the expected value of portfolio returns, over the 6-year period.

c. Calculate the standard deviation of expected portfolio returns, over the 6-year period.

d. How would you characterize the correlation of returns of the two stocks L and M?

e. Discuss any benefits of diversification achieved by Jamie through creation of the portfolio.

Oct 13 2014 10:00 AM

Solutions:

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Formulas Used:Expected Return of Portfolio rp =WL*RL+WM*RM
Expected value of portfolio returns, over the 6-year is qual to average of Expected portfolio return, rp, for each 6 years.Value of correlation factor between stocks L and M is negative and close to -1 .Major benefits of diversification achieved by Jamie through by creation of the portfolio
is that standard deviation(risk) of portfolio is less than individual standard deviation of both stocks

I have 2 problems and I need to do the work in excel. Everything must be properly labeled.

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Consider the following capital market: a risk-free asset yielding 1.25% per year and a mutual fund consisting of 75% stocks and 25% bonds. The expected return on stocks is 10.25% per year...